Optimal Financial Aid Policies for a Selective University

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Our paper provides a model of optimal financial aid policies for a selective university. The model implies that the financial aid package to be offered to each category of admitted applicants depends on the elasticity of the fraction who accept offers of admission with respect to the financial aid package offered them, the propensity of the category to enroll, the elasticity of the category's average quality with respect to the number admitted, and the relative weight the university assigns them in the utility function. While the latter must be determined subjectively, the former parameters are subject to empirical estimation. We conclude with a study of one institution's data and illustrate how they may be estimated. These estimates are then applied to illustrate what the "optimal" financial aid policy would be for the university.

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